Fixed Income  

Supreme Court backs Lloyds in bond issuance case

Supreme Court backs Lloyds in bond issuance case

The UK Supreme Court has ruled in favour of Lloyds Banking Group’s decision to call in more than £3bn of high income-paying bonds.

The investment terms meant that Lloyds could redeem the ‘enhanced capital notes’ early at face value, as they no longer counted towards the bank’s capital buffer.

Investors believed the bonds were worth more than par and the terms did not allow for them to be called in early.

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A statement from the court explained that in March 2009, Lloyds failed a stress test carried out by the regulator, showing the group had a shortfall in core tier-one capital.

Lloyds therefore implemented a strategy to raise the necessary core tier-one capital, involving a rights issue and a restructuring of some of its securities as enhanced capital notes, which provided an advantage in the context of the regulator’s stress tests.

Although issued as debt instruments, they would convert automatically into fully paid-up ordinary shares if Lloyd’s core tier-one capital ratio fell below a certain limit during a stress test.

The restructuring was carried out in November 2009 by way of an exchange offer memorandum sent to holders of existing securities, including around 123,000 retail investors.